Friday, June 12, 2015

ANALYSIS: Delta Adds the Embraer E190 to its Fleet

By Vinay Bhaskara / Published June 12, 2015

An Air Canada Embraer, E190. Image: Courtesy of Air Canada

Delta Air Lines is adding 20 new Embraer E190 aircraft to its fleet, doubling down on capacity in the 100-seat aircraft sector a decade after the segment was largely eliminated from the fleets of U.S. airlines.

The aircraft, formerly with Air Canada, are being bought second-hand from Boeing Capital, the finance arm of original equipment manufacturer (OEM) Boeing. The Chicago-based airframer also won an order for an additional 40 Boeing 737-900ER aircraft, bringing Delta’s total order book for the largest Boeing 737 Next Generation (737 NG) variant to 140 aircraft, of which 40 frames have been delivered.

The orders are contingent on the confirmation of a new contract by Delta’s pilots, approved earlier this week by the Delta Master Executive Council (MEC) of the Air Line Pilot Association (ALPA). Highlights of the contract include increased pay, reduced profit sharing, newly created pay scales for the E190 and Airbus A350 (among others), and a commitment to add a new 100-seat aircraft to the fleet. The 20 Embraer E190s are former Air Canada aircraft, which Boeing Capital agreed to purchase in December 2013 in return for an Air Canada order for 61 Boeing 737 MAX aircraft. The flip of used aircraft to Delta mirrors Delta’s deal to lease in 88 ex-Southwest Airlines (and AirTran) Boeing 717s, which were returned to Boeing by Southwest after the Dallas-based low-cost carrier couldn’t make the aircraft work at its higher cost base.

The first flight of the 737-900 on August 3, 2000. Image: Courtesy of Boeing

100-seaters may have turned the corner in the United States

The Douglas DC-9; the Fokker F100; even the BAe 146: U.S. airlines have operated 100-seat jets for most of the 63 years since the advent of the jet age. But in the late 1990s and early 2000s, the type fell out of favor as airline fleets diverged to the extremes of 50-seat regional jets and 737-700/A319 sized mainline aircraft. The 100-seat jet was in a (not so) sweet spot where labor costs rendered it uncompetitive versus outsourced regional jets (RJs), while fuel efficiency (or lack thereof) and a lack of trip cost reduction versus larger aircraft in the same family made it uncompetitive with larger A320 family and 737NG mainline planes.

On the demand side a few holes did emerge, most notably for American Airlines at Chicago O’Hare. But by and large there was no place for 100-seaters in U.S. carrier fleets. The A318 and 737-600 barely sold. The E190 did find an initially willing buyer at JetBlue, though the type has fallen out of favor in recent years as the leisure carrier’s cost base has risen. But despite traction for the E-Jets and largest CRJ variant around the world, U.S. carriers remained immune to their charms (absent orphan subfleets at perennial screwup Frontier Airlines [pre Indigo Partners] and US Airways). Until now.

With similar seating capacity, the CSeries CS100 is an indirect competitor to the Airbus A318. First introduced into service in 2003 with Frontier Airlines, the A318 has been the poorest seller in the A320 family with only 84 orders/deliveries. Though not out of production, some A318s have been broken up. The A318′s higher seat cost per mile have caused it to fall out of favor with the parts cost being worth more then the intact airframe. Image courtesy: Airbus

Thanks to a combination of several factors (consolidation, low fuel prices, fortress hubs, and the declining economics of RJs), a 100-seat aircraft now makes sense for all three legacy U..S airlines, and a few of the smaller players, like Alaska Airlines, as well. Delta was the first mover on this trend with the 717s, and it doubled down with these E190s. Rival United Airlines has also expressed interest in the re-engined E190-E2 or its beleaguered competitor, the Bombardier CSeries. And for airlines with nationwide networks, 100 seaters offer a bevy of advantages.

First and foremost, they allow airlines to best match capacity to demand. Delta has been aggressive about using the 717 to up or downgauge markets at its hubs that could use more capacity than current 76-seat RJs or less capacity than the A319 or scarce 737-700s. Expect to see more of the same when the E190s enter the fleet. Relative to those 76-seat RJs, the E190 offers operating cost and fuel efficiency advantages as well. And despite airlines’ feverish attempts to shift consumers away from this thinking, customers, particularly product-savvy business travelers that are critical to the health of several small and mid-sized markets for Delta, still prefer the larger mainline aircraft.

How does Delta add more E190s to the fleet?

While these 20 aircraft made a lot of sense given their age (all of Air Canada’s E190s were delivered between 2005 and 2008 – this deal covers 20 of the 45 aircraft) and cost (cheap), 20 aircraft is a bit small for a subfleet in Delta’s overall fleet. The only narrowbody aircraft with fewer than 20 frames on property are the 737-700 (10 frames) and the Boeing 757-300 (16 frames), both of which are part of a larger family of aircraft with more than 50 frames in the fleet. And from a commonality perspective, Delta’s E190 fleet needs enough critical mass to justify its purchase versus other forms of incremental lift. While the E190 is not being sold of as rapidly as early-generation A320s, there are a few frames that will hit the market over the next couple of years.

Air Canada isn’t exactly thrilled about the 25 E190s it retained in its fleet, and Delta could be a natural endpoint for those frames (which have 10-12 years of solid work left in them). Flybe has expressed interest in ridding itself of its 10 E195s (which are in the same family though not the same type). But the most interesting candidate might actually be JetBlue, who has soured on the E190 as its rising cost base rendered them increasingly uneconomical. JetBlue operates 60 E190s with 24 remaining on order, but those deliveries have been delayed to 2018 (in-line with when the E190-E2 will enter service). A deal where JetBlue offloads a portion of its E190 fleet and/or transfers its remaining deliveries to Delta (with a discount from Embraer perhaps) could make a ton of sense for all parties involved. And given Delta’s opportunistic nature, the carrier could very well work its way to a fleet of 50-75 E190s with very little extraneous capital expenditure.

Cover Image: Courtesy of Embraer

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